BoJ unexpectedly tweaks YCC: widens 10yr yield band to +/-0.5% (prev. +/-0.25%) to increase bond purchases to JPY 9tln/m (prev. 7.3tln/m) in Q1; keeps rate unchanged with rates at -0.10%, and maintains 10yr JGB yield target around 0% as expected

YCC

• Decision unanimous.


• Will review operation of Yield Curve Control (YCC)


• 10yr yield can move freely between -0.5% and +0.5% (prev. +/-0.25%)

JGB PURCHASES

• To conduct additional JGB purchases on Dec 22


• To make nimble responses for each maturity by increasing the amount of purchases even more and conducting fixed-rate purchases operations when deemed necessary.


• Will buy JPY 200-400 of 1yr-25yr JGBs in Jan-Mar.

MARKET COMMENTARY

• Volatility has increased since spring.


• Japan's market functioning has declined


• Japan's economy is expected to recover as the impact of the pandemic and supply constraints subside.

GUIDANCE

• Rate guidance unchanged; expects short and long-term policy rates to remain at present or lower levels.

Via BoJ

Reaction details (03:25)

In an immediate reaction (in thinner pre-Christmas liquidity) to the unexpected widening of the YCC band, an immediate risk of reaction was seen in across all markets:

FX:

• JPY was the first mover in which USD/JPY slumped from 137.00 to a 133.11 low over 15 minutes.


• DXY was pushed lower from 104.66 to a 103.94 low.

FIXED INCOME

• 10yr UST Mar futures slipped from around 114'05 to 113'14 over 20 minutes, with the 10yr cash yield rising from 3.5846% to 3.7068%.


• Bund Mar futures slumped from 137.15 to a 136.28 low over the same period.


• Japanese 10yr yield soared by 20.5bps to 0.455%; the highest since 2015.  10yr JGB futures tumbled by 200 ticks to a 6-month low.

STOCKS

• US and European equity futures fell into the red with the ES March slipping from around 3,850 to a 3,815.75 low, whilst Dax Mar fell from 14,000 to a 13,860 low.


• Nikkei 225 was dragged lower from 27,290 to a 26,337 low.

OTHERS

• Crude oil futures saw modest downticks on the firmer Dollar.


• Spot gold rose from around USD 1,786/oz to USD 1,796/oz.


• Crypto markets were little impacted.

Analysis details (03:43)

• The decision to review the operations of YCC took markets by surprise in thinner volumes ahead of the Christmas holidays. The widening of the 10yr yield band signals a lessening in easy policy. Expectations were for no tweaks to BoJ policy until at least next year, until Governor Kuroda's term ends in April. The BoJ increased the number of outright purchases of Japanese Government Bonds (JGBs). The adjustment is intended to “improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions,” the central bank said.


• Kuroda's press conference is due at 06:30GMT/01:30EST.

20 Dec 2022 - 03:01- Fixed IncomeEconomic Commentary- Source: Newswires